Definition
Inventory turnover is the cost of goods sold for a period divided by average inventory. It shows how many times a business sells and replaces its stock in that period. Dividing 365 by the turnover gives days inventory outstanding (DIO), the average number of days goods sit in the warehouse before they are sold.
How it works
A higher turnover usually means leaner stock, less cash tied up and less risk of obsolescence; a very high turnover can also mean frequent stockouts. A falling turnover is an early warning of slow-moving or obsolete items that may need a write-down to net realisable value.
Use cost of goods sold rather than sales so both sides are measured at cost, and average the opening and closing balances, or monthly balances for seasonal businesses. Inventory days feed directly into the cash conversion cycle. Ledgeriano's inventory module reports stock on hand, ageing and a reorder list per warehouse.
Formula
Inventory turnover = Cost of goods sold / Average inventory
Average inventory = (Opening inventory + Closing inventory) / 2
Days inventory outstanding = 365 / Inventory turnover
Example: a hardware retailer
A retailer's cost of goods sold for the year is 480,000. Inventory was 70,000 at the start and 90,000 at the end, so average inventory is 80,000. Turnover is 480,000 / 80,000 = 6 times a year, and goods stay in stock about 365 / 6 = 61 days.